Refinancing versus Recapitalization and some tips in Value Investing

The term refinancing is usually used when a person or corporation wishes to replace an old debt with a new one, such as when a person refinances his or her house. The person still has a mortgage, but gets a new loan from one bank, usually with interest expense, to pay off the mortgage with the previous bank with a higher interest expense so the person can save on interest expenses.

Recapitalization is most oftenly used by businesses and corporations to change their debt or equity mixture, usually exchanging one security for another, such as preferred shares to debt. Or issue more stock to pay off debt increasing the proportion of equity capital to debt capital. This is done to provide more stability to the capital structure, or ward of hostile take-overs, minimize taxes or exit strategy for venture capitalists.

When a company decreases its debt in proportion to equity, it's leverage decreases, and so earnings would decrease but the company would be less risky since the shareholders will have fewer debt expenses before they see profits and less senior securities to pay in case of liquidation.

P.s. Thus in value investing, it is important to not only look at the stated book value of the company, but also take a look at the composition of the assets themselves, whether these assets actually have value when sold or liquidated, or look at the asset's market value.

Source: http://www.investopedia.com/terms/r/recapitalization.asp